wage and hour

In one of the most sweeping employment-law decisions from the California Supreme Court in the last few decades, the California Supreme Court just released an unanimous decision in the case of Dynamex Operations West, Inc. v. Superior Court, which will not only have immediate ramifications to businesses statewide but will seriously affect several nascent industries that are projected to come into fruition in the coming decade. By replacing the traditional multi-factor test that primarily focused on the control of the employer over the work completed by the Independent Contractor, employers must now immediately re-evaluate whether its current usage of Independent Contractors is still permissible under the new ABC Test and also whether it makes any sense to use them at all moving forward.

Factual Background

This new case is the result of a class action filed on behalf of independent contractors employed by Dynamex, a same-day courier and delivery service that operates a number of business centers in California. Prior to 2004 Dynamex classified drivers who picked up and delivered the packages from Dynamex customers as employees rather than independent contractors. In 2004, Dynamex adopted a new business structure under which it required all of its drivers to enter into a contractual agreement that specified the driver’s status as an independent contractor. Like many other employers currently using independent contractors, Dynamex’s drivers were generally free to choose the sequence in which they will make deliveries and the routes they will take, but were only required to complete all assigned deliveries on the day of assignment.

Among the five causes of action alleged, the class plaintiff sued Dynamex for its failure to pay overtime compensation, to properly provide itemized wage statements, and to compensate the drivers for business expenses as the result of its classification of its drivers as independent contractors. It should be noted that the plaintiff in this case brought a class action on behalf of all similarly situated employees after working only three months as an independent contractor for Dynamex.

Legal Background

In an effort to explain its (r)evolution to the new legal standard, the California Supreme Court’s eight-one (81) page opinion details the history of legal precedents that have long guided employers starting with the previously-seminal case of S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341 (where the traditional multifactor ‘control’ test had been originally endorsed). For example, in discussing Borello, the California Supreme Court emphasized that “In no practical sense are the ‘sharefarmers’ entrepreneurs, operating independent businesses for their own accounts; they and their families are obvious members of the broad class to which workers’ compensation protection is intended to apply.”

In an attempt to limit its damages, Dynamex argued that, regardless of whether the misclassified independent contractor should be considered an employee for purpose of wages, any violations of the wage orders should be treated differently. Although the Court agreed that the ‘suffer or permit to work’ language contained in wage orders implied that it should only cover employees, the Court reiterated that the “suffer or permit” language was so broad as to encompass the requirements of the ABC test. In other words, violations of the wage orders equally apply to any worker unless the hiring entity can prove that each of the three factors below has been met.

The Supreme Court’s New ‘ABC’ Test

Under the so-called “ABC” test announced in the Dynamex case, a worker is only properly classified as an independent contractor only if the hiring entity establishes each of the following:

(A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact;

(B) that the worker performs work that is outside the usual course of the hiring entity’s business; and

(C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

In adopting this test, the Supreme Court adopted this new standard with essentially the presumption that a worker hired by an entity is an employee and that the burden is on the hirer to establish that the worker is an independent contractor.

Putting aside from the first and familiar ‘control’ factor, the real burden now for the employer is to show that, as required by the second factor, the work performed by the independent contractor is outside the course of the hiring entity’s business. As an example, the California Supreme Court explained that while a plumber could be hired to do work on a regular basis as independent contractor for a bakery, a worker making cakes, even at home, cannot be an independent contractor because baking is at the core of the employer’s business of making cakes.

In explaining the third factor, the Supreme Court equated that factor as to an analysis of whether that independent contractor in reality was its own business. Borrowing from an example from a different case in Vermont involving siding installers, the California Supreme Court reasoned that although those siding workers provided their own tools, no evidence was presented that “the installers had business cards, business licenses, business phones, or business locations” or had “received income from any party other than” the hiring entity.

Court Announces That It Has the Ongoing Mandate To Ensure That The Statutory Purpose Of Any Wage Hour Law Is Being Met At Any Given Moment

Another important aspect of the Dynamex case, a point that is largely missing in the popular news reports of this case, is the Supreme Court’s explicit message that it would review any employment law case from a perspective as to whether the underlying statutory purpose is currently being met (as opposed to whether the employer’s conduct is in compliance with the current legal standard). Should the Supreme Court determine that any previously-enacted legal standard is not doing enough to achieve its original legislative purpose; the Court is free to judicially update any previously-announced standard to achieve its view of the desired result.

As the Court explained in Dynamex, since “the California Legislature has not exhibited or registered any disagreement with either the statutory purpose standard adopted by the Borello decision” and has continued to “impose substantial civil penalties on those that willfully misclassify,” the Court may now impose a more burdensome standard. As the California Supreme Court sees it, the new change is justified because, “the misclassification of workers as independent contractors rather than employees is a very serious problem, depriving federal and state governments of billions of dollars in tax revenue and millions of workers of the labor law protections to which they are entitled.”

What Employers Should Do Now

The implications to the adoption of the ABC test are broad and wide-ranging.

All employers must take a serious evaluation as to whether it should continue to employ independent contractors, especially if those independent contractors are performing work that is within the usual course of the hiring entity’s business. Employers need to decide whether it should continue to use independent contractors because the risks are so high. A legal determination that an employee was improperly classified results in potential violations for unpaid overtime, meal period, rest period, check stub violations, and many other labor code violations and penalties. Improper classification also implicates the non-payment of taxes to the EDD, IRS and other taxing agencies, which can lead to even more potential liability.

The case also threatens to undermine those jobs that constitute a part of ever-growing ‘gig’ economy. As stated by the plaintiff’s attorney in the San Jose Mercury News, this case will have a profound impact on jobs in the gig economy, such as Uber or Lyft. Over time, it will be interesting to see if this case speeds up the adoption of fully-autonomous solutions and/or the use of artificial intelligence solutions (where little to no human labor is required).

Companies do have several options. Aside from the option of converting these workers to employees, employers can change their business structures to distinguish themselves from the service-related aspects of the business (say from a taxi service to that of an auto manufacturer) and only selectively employ those independent contractors that truly are independent business operations that services different clients (i.e. John Smith LLC that employs drivers that deliver for Yelp, Lyft, Uber etc.).

There are practical difficulties presented by this case by virtue of the fact that this law was enacted by a court as opposed to the Legislature. In the two other states where this law had been on the books in the US, there had been a period of adjustment and contemplation before it was placed onto the books. When the ABC test was adopted in the state of Massachusetts, it was adopted by the legislature in 1990 and amended thereafter. In the New Jersey, that state’s Supreme Court recently affirmed its broader use after it had already been enacted by the legislature and had been enforced by that state’s department of labor as the applicable standard for some time. No doubt, litigation over the scope of impact of the Dynamex case will be worsened because of the manner of its introduction. If there was ever a decision that should be reviewed by the California legislature, this is one (e.g. AB 1513 and the piece-rate safe harbor).

The bottom line, not only should employers consider whether any of their independent contractors should be converted to regular employees, but also assess how they can mitigate any potential liability from claims from their current or former independent contractors.

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In a major setback for California employers, the California Supreme Court issued a decision in the matter of Williams v. Superior Court, wherein it ruled that an individual employee asserting a Private Attorney General Act (PAGA) action had the right to seek contact information of every other company employee throughout the entire state.

In Williams, a retail worker asserted various wage and hour violations against his employer, Marshall’s, as a representative action under the PAGA statute. Although the employee was located in the Costa Mesa store, Plaintiff’s counsel propounded discovery requests seeking the name, address, telephone number, and company employment history of each nonexempt California employee that had worked for Marshall’s throughout the state in the last two years. In response, Marshall’s refused to provide the information on the basis that the request for contact and employment information statewide was overbroad considering that the request extended beyond Williams‘s particular store and job classification and there were approximately 16,500 employees; unduly burdensome because Williams sought private information without first demonstrating he was aggrieved or that others were aggrieved; and an invasion of the privacy of third parties under California Constitution, Article I, section 1. Plaintiff filed a motion to compel in Los Angeles Superior Court.

Interestingly enough, during the hearing process, Plaintiff reduced its initial demand and instead stated he was willing to accept information from a representative sample of 10 to 20 percent of employees. However, the trial court denied the reduced request and instead ordered Marshall’s to provide information only for the Costa Mesa store where Williams worked, subject to a “Belaire-West” notice to the affected employees to guard their privacy rights. Williams appealed but the appellate court upheld the trial court’s order.

A unanimous California Supreme Court rejected Marshall’s arguments stating that “[c]ontact information regarding the identity of potential class members is generally discoverable, so that the lead plaintiff may learn the names of other persons who might assist in prosecuting the case.” The Curt further stated that limiting discovery “would grant the defendant a monopoly on access to its customers or employees and their experiences and artificially tilt the scales in the ensuing litigation.”

The Supreme Court also rejected that the procedural differences between PAGA representative actions and traditional class actions. In PAGA, unlike in class actions, employees identified in discovery are not considered parties or clients of plaintiff‘s counsel and do not subject plaintiff or counsel to scrutiny with respect to the ability to represent a large class. Putting these differences aside, the Supreme Court stated that the interests of plaintiff, counsel, and other potentially aggrieved employees are largely aligned as all “stand to gain from proving as convincingly as possible as many Labor Code violations as the evidence will sustain, thereby maximizing the recovery for aggrieved employees as well as any potential attorney fee award.”

The Supreme Court rejected the argument that the disclosure of the information should be limited or conditional. The Court held there was no basis for courts to condition the disclosure of contact information on prior proof of a uniform or companywide policy. Moreover, the Court held that the privacy interests of fellow employees elsewhere in California are addressed by conditioning disclosure on the sending of a Belaire-West notice, as was done for Plaintiff’s store.

This decision tips the scales in favor of employees such that Plaintiff’s counsel will now be able to broadly seek contact information for employees as a means to increase the value of its case. Defense counsel must now be aggressive in reducing the contours of PAGA claims at the pleading stage before the discovery process begins. Counsel will now have to be creative and aggressive in ensuring that some limits are placed on the information disclosed.

Contact our firm if you have any further questions about how to further structure your business in light of this result or if you are facing a PAGA lawsuit.

Sergio H. Parra is the lead attorney for L+G’s labor and employment practice. Sergio represents a wide array of employers and businesses in labor and employment related litigation in state, federal and administrative venues. Sergio is also called on a daily basis to provide practical advice on employment matters, including internal complaints and investigations, employment agreements and wage and hour matters.

This question was answered last week by the 9th Circuit of Appeal in the case of Arias v. Raimondo, (2017 BL 214215, 9th Cir., No. 15-16120, 6/22/17). This case arose from an earlier lawsuit in 2006 wherein Jose Arias sued his former employer Angelo Dairy in State Superior Court for various wage and hour violations, including failure to provide overtime, rest and meal periods, and under PAGA. The case had been hotly contested for over five years before it had been finally set for trial for August 15, 2011.

Ten weeks before trial, however, the Angelos’ attorney, Anthony Raimondo, hatched an ”underhanded plan” to have Immigration and Custom Enforcement (“ICE”) arrest and deport Arias at an upcoming deposition. Evidently, after Plaintiff Arias became aware of the plot, he instead agreed to settle the case to avoid the threat of deportation hanging over him and his family. It seemed liked the plot had worked.

However, two years later on May 8, 2013, Plaintiff Arias filed a federal lawsuit against his former employer and their attorney for retaliation under the Fair Labor Standards Act (FLSA). Although Angelo Dairy and its owners settled their part of this case early on, Arias continued his case against the attorney on the theory that he, acting as the Angelos’ agent, retaliated against him, by trying to him deported during the earlier lawsuit.
Although the FLSA primary wage and hour obligations fall squarely on the shoulders on the employers, the 9th Circuit held that the anti-relation provision of the FLSA, was specifically also applied to any agent or “person acting directly or indirectly in the interest of an employer in relation to an employee.” As such, the 9th Circuit rejected Mr. Raimondo’s argument that because he was never Arias’s actual employer, he could not be held liable for retaliation under the FLSA. There is no current word yet if Mr. Raimondo will try to seek review by the United States Supreme Court.

Regardless, this case presents several lessons that all employers should heed. First off, an employer must try to avoid temptation, during the heat of the litigation battle, to create additional risk for the company and, instead focus on narrowing the issues involved and winning a case on its merits. Involving federal authorities in a state law dispute not only raises certain moral and ethical concerns, but may also be a double-edged sword. A telephone call to ICE by an employer to report that one of its employees may not be legally entitled to work in the US, may lead ICE itself to also wonder about the reporting employer’s I-9 and employment verification practices. Most importantly, as evident by the Arias case, an employer must analyze and appreciate there are many protections under both federal and state law that prevent retaliatory conduct after a lawsuit or claim had been filed by the employee.

Lastly, any person involved in making HR decisions, whether as an employee or as attorney, must be cognizant that their own actions and electronic communications may be later scrutinized. In reaching its opinion, the Ninth Circuit Court’s opinion quotes from various text messages sent by Mr. Raimondo to ICE and other attorneys not only where he describes his deportation plot, but where Mr. Raimondo admits doing the same thing on five other occasions. Ouch. As stated by the Court, the FLSA is “remedial and humanitarian in purpose. We are not here dealing with mere chattels or articles of trade but with the rights of those who toil, of those who sacrifice a full measure of their freedom and talents to the use and profit of others… Such a statute must not be interpreted or applied in a narrow, grudging manner.”

Sergio H. Parra is the lead attorney for L+G’s labor and employment practice. Sergio represents a wide array of employers and businesses in labor and employment related litigation in state, federal and administrative venues. Sergio is also called on a daily basis to provide practical advice on employment matters, including internal complaints and investigations, employment agreements and wage and hour matters.

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If you’ve eaten in San Francisco recently, odds are that your restaurant bill had a charge below the sales tax, charging you up to 4% of your bill to cover healthcare costs for its employees. A recent trend in California and nationwide has seen the increasing use of surcharges, either in response to the passage of the Affordable Care Act, living wage ordinances or statewide increases to the minimum wage.

Earlier this year, an investigation was launched by the San Diego District Attorney’s Office of local restaurants that had recently implemented 3% surcharges in response to minimum wage increases. These restaurants are being investigated for violations under California’s Unfair Competition Laws, which are designed to protect consumers from unfair business practices and false advertising. Because of these broad consumer protections, customers must be made fully informed about these surcharges as soon as possible, not after they’ve eaten their food and received the bill, or worse yet, on the way home.

On the back end, restaurants must also be taken to ensure that the monies are separately accounted for and actually expended as charged. There is also specific guidance from the State Board of Equalization and the IRS on how these monies should be treated. Moreover, individual restaurants should be careful in pursuing these surcharges in concert with other business owners to avoid any antitrust allegations.

The bottom line is that although restaurant surcharges are not per se illegal in California, the legality of such surcharges are currently under scrutiny and thus, will require the attention of attorney to minimize the risks associated with their introduction.

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A strong reason for establishing a corporation or limited liability company is to attain protection against personal liability as the result of the company’s debts or liabilities. While it is traditionally true that the corporate form provides direct protection for owners, directors and officers, California courts are increasingly holding owners liable for labor code violations.

This trend led to the enactment of California’s so-called “A Fair Day’s Pay Act” on Jan. 1, 2016, which formalized and extended the case law even further.

Labor Code Section 558.1 now holds that “any owner, director, officer, or managing agent of the employer” that is “acting on behalf of an employer” who violates, or causes certain wage and hour laws to be violated, may be held liable as the employer for such violation.

This expanded liability encompasses most of the common wage and hour violations, such as overtime, minimum wage, pay stub violations, meal and rest periods, and failure to reimburse business expenses, as well as waiting time penalties. A “managing agent” under Civil Code 3294 is one who exercises substantial discretionary authority over decisions that ultimately determine corporate policy. In most cases, personal liability would not reach payroll managers and may not reach HR managers. From the employee/plaintiff’s point of view, individual defendants are chosen for their deep pockets or for their control of the litigation.

Because of this, owners (including directors, officers and managing agents) of corporate entities must be cognizant that if they are wrongly directing employees in regards to work schedules, wages etc., that they may be unknowingly creating liability for themselves as individuals. If possible, owners etc., should train and rely upon its work supervisors and HR staff to supervise wage/hour compliance. This new liability risk should provide even more incentive for businesses to have strong employment policies in place and to review their labor and employment practices on an annual basis to avoid liability in the first place.